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ITA 1521/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8065 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 27-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUPRIYO PAL
• Assessee Lawyers: R SANKARANARAYANAN
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B B ENCH, CHENNAI . . . , . , & BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NOS.1520 & 1521/MDS/2016 ( / ASSESSMENT YEARS: 2010-11 & 2011-12) THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-6(1), CHENNAI. VS M/S. SCOPE E KNOWLEDGE CENTRE PVT. LTD., 2 ND FLOOR, TEMPLE TOWER, 672, ANNA SALAI,NANDANAM, CHENNAI-600 035. PAN:AABCS0286N ( /APPELLANT) ( /RESPONDENT) REVENUE BY : MR. SUPRIYO PAL, JCIT ASSESSEE BY : MR. R.SANKARANARAYANAN, C.A. /DATE OF HEARING : 10 TH AUGUST, 2016 /DATE OF PRONOUNCEMENT : 2 ND NOVEMBER, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THESE TWO APPEALS ARE FILED BY THE REVENUE AGGRIEV ED BY THE SEPARATE ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-15, CHENNAI BOTH DATED 03.03.2 016 IN ITA NOS.440 & 27/CIT (A)-15/13-14 & 14-15 UNDER SEC TION 143(3) R.W.S. 250(6) OF THE ACT. 2. THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS AP PEALS, HOWEVER, THE CRUXES OF THE ISSUES ARE AS FOLLOWS:- I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DIRECTING THE LEARNED ASSESSING OFFICER TO RE-COMPUTE THE DEDUCTION 2 ITA NOS. 1520 & 1521/MDS/2016 UNDER SECTION 10A OF THE ACT BY EXCLUDING THE EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER AND ALSO FROM THE TOTAL TURNOVER FOR THE ASSESSMENT YEARS 2010-11 & 2011-12. II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DIRECTING THE LEARNED ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO RS.5,33,825/- BY INVOKING THE PROVISIONS OF SECTION 14A R.W.S. 8D OF RULES FOR THE ASSESSMENT YEAR 2010-11. III) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DIRECTING THE LEARNED ASSESSING OFFICER TO DELETE THE DISALLOWANCE AMOUNTING TO RS.1,04,94,000/- ON EXPORT COMMISSION UNDER SECTION 40(A)(IA) OF THE ACT FOR THE ASSESSMENT YEAR 2010-11. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DATA PROCESSING FILED ITS RETURNS OF INCOME FOR THE ASSESSMENT YEARS 2010-11 & 2011- 12 ON 21.09.2010 & 27.09.2011 ADMITTING INCOME OF RS.58,60,348/- & RS.8,26,493/- RESPECTIVELY. THE C ASE WAS SELECTED FOR SCRUTINY FOR BOTH THE ASSESSMENT YEARS AND NOTICES WERE SERVED ON THE ASSESSEE. SUBSEQUENTLY, THE ASSESSMENTS WERE COMPLETED BY THE LEARNED ASSESSING OFFICER FOR BOTH THE ASSESSMENT YEARS UNDER SECTION 143(3) OF THE ACT ON 08.02.2013 & 31.03.2014 RESPECTIVELY, WH EREIN HE MADE CERTAIN ADDITIONS/DISALLOWANCES. 3 ITA NOS. 1520 & 1521/MDS/2016 GROUND NO.1: RE-COMPUTING THE DEDUCTION UNDER SECTI ON 10A OF THE ACT BY EXCLUDING THE EXPENSES INCURRED I N FOREIGN CURRENCY FROM THE EXPORT TURNOVER AND ALSO FROM THE TOTAL TURNOVER FOR THE ASSESSMENT YEARS 2010-1 1 & 2011-12. 4.1 IT WAS NOTICED BY THE LEARNED ASSESSING OFFICER THAT FOR THE PURPOSE OF CALCULATING DEDUCTION UNDER SECTION 10A OF THE ACT THE ASSESSEE HAD NOT DEDUCTED THE EXPENDITURE INCURRED IN FOREIGN CURRENCY TOWARDS SALES COMMISSION, MEMBE RSHIP COST OF DATA ACCESS CHARGES FOR THE DEVELOPMENT OF PROJECT ETC., FROM THE TOTAL TURNOVER. THE LEARNED ASSESSIN G OFFICER RECOMPUTED THE DEDUCTION BY EXCLUDING THESE EXPENSE S FROM THE TOTAL TURNOVER IN ACCORDANCE WITH THE PROVISION S OF SECTION 10A (8) EXPLANATION 2(IV) OF THE ACT. 4.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) FOLLOWING THE DECISION OF THE SPECIAL BEN CH OF THE TRIBUNAL IN THE CASE OF SAK SOFT LTD., REPORTED IN 313 ITR (AT) 353 DIRECTED THE LEARNED ASSESSING OFFICER TO EXCLU DE THOSE EXPENSES FROM THE TOTAL TURNOVER AS WELL AS FROM TH E EXPORT TURNOVER FOR BOTH THE ASSESSMENT YEARS, AGGRIEVED B Y WHICH THE REVENUE IS IN APPEAL BEFORE US. 4 ITA NOS. 1520 & 1521/MDS/2016 4.3 WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF TH E LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE, BECAUSE HE HAS ONLY FOLLOWED THE DECISION OF THE SP ECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF SAK SOFT LTD. , CITED SUPRA. ACCORDINGLY, THIS GROUND RAISED BY THE REVEN UE FOR BOTH THE ASSESSMENT YEARS IS DEVOID OF MERIT. GROUND NO.2: DISALLOWANCE TO RS.5,33,825/- BY INV OKING THE PROVISIONS OF SECTION 14A R.W.S. 8D OF RULES FO R THE ASSESSMENT YEAR 2010-11: 5.1 THE ASSESSEE COMPANY HAD MADE INVESTMENT OF RS.42,74,628/- DURING THE RELEVANT PREVIOUS YEAR AN D HAD AN OPENING BALANCE OF RS.6,04,01,346/- OUT OF WHICH IT EARNED DIVIDEND INCOME OF RS.5,33,825/- WHICH IS EXEMPT FR OM TAX BY VIRTUE OF SECTION 10(38) OF THE ACT. THEREFORE THE LEARNED ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A R.W.R 8D AND COMPUTED THE DISALLOWANCE AS FOLLOWS:- RULE 8D CALCULATION: A) AMT. OF EXPENDITURE DIRECTLY RELATING TO EXEMPT INC OME : NIL B) INTEREST : I) INT. ON SECURED LOAN & OTHERS : 3,75,57,987 II) AVERAGE INVESTMENT :60401346 +4274628/2: 3,23,37,987 III) AVERAGE ASSET 23,28,33,606 5 ITA NOS. 1520 & 1521/MDS/2016 A X B / C : 3,75,57,987 X 3,23,37,987 / 232833606 = 51,50,028 0.5% OF AVERAGE INVESTMENT :1,61,690 DISALLOWANCE U/S.14A : 51,50,028 + 1,61,690 = 53 ,11,718 5.2 WHILE DOING SO, THE LEARNED ASSESSING OFFICER RELIED IN THE DECISION RENDERED IN THE CASE OF GHEM INVEST LT D. VS. ITO REPORTED 120 ITD 318 BY THE DELHI BENCH OF THE TRIB UNAL AND REJECTED THE DECISION CITED BY THE LEARNED AUTHORIZ ED REPRESENTATIVE IN THE CASE PUNJAB STATE CO-OPERATIV E & MARKETING BY THE CHANDIGARH BENCH OF THE TRIBUNAL. 5.3 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) DIRECTED THE LEARNED ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO RS.5,33,825/- BY RELYING ON THE DECISION OF THE PUNJAB STATE CO-OPERATIVE & MARKETING WHICH WAS CITED BY THE LEARNED AUTHORIZED REPRESENTATIVE. 5.4 ON ANALYZING THE ISSUE, WE FIND THAT THE CHENNA I BENCH OF THE TRIBUNAL IN THE CASE NATIONAL TRUST HOUSING FINANCE LTD. VS. ACIT IN ITA NOS.10 TO 13/MDS/2016 VIDE ITS ORDER DATED 28.04.2016 HAS DECIDED THE ISSUE AS FOLLOWS: - DISALLOWANCE U/S.14A R.W.R 8D: 6 ITA NOS. 1520 & 1521/MDS/2016 5. THE LEARNED ASSESSING OFFICER HAD INVOKED THE PROVISIONS OF SECTION14A R.W.R 8D BECAUSE THE ASSESSEE HAD INVESTED IN SHARES, THE DIVIDEND INCOME OF WHICH, IS EXEMPT FROM TAX AND THEREBY COMPUTED THE DISALLOWANCE BY ADOPTING 0.5% OF THE AVERAGE OF THE OPENING AND CLOSING BALANCE OF INVESTMENT IN THE RELEVANT ASSESSMENT YEAR WHICH WORKS OUT TO RS.29,189/. SINCE THE DISALLOWANCE MADE BY THE LEARNED ASSESSING OFFICER IS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE ORDERS OF THE REVENUE. ACCORDINGLY, THIS GROUND IS ALSO HELD AGAINST THE ASSESSEE. 5.5 FOLLOWING THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL WE DO NOT HAVE ANY HESITATION TO HOLD THAT COMPUTATION OF DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE RULES IS MANDATORY AND THERE IS NO SCOPE TO DIL UTE THE SAME. FURTHER WE ARE ALSO OF THE VIEW THAT WHERE TH E ASSESSEE HAS INVESTED IN INVESTMENT, EARNING EXEMPT INCOME, OUT OF ITS OWN FUNDS VIZ., CAPITAL, RESERVE S ETC., THEN NO INTEREST ELEMENT CAN BE ATTRIBUTED TO SUCH INVES TMENT AND THE SAME SHOULD NOT BE TAKEN INTO CONSIDERED FOR TH E PURPOSE OF CALCULATION OF DISALLOWANCE UNDER RULE 8D(2)(II) OF THE RULES BECAUSE THERE IS INTEREST COST ON SUCH INVEST MENT. THEREFORE, WE HEREBY DIRECT THE LEARNED ASSESSING O FFICER TO RE-COMPUTE THE DEDUCTION UNDER SECTION 14A R.W.R 8D BASED 7 ITA NOS. 1520 & 1521/MDS/2016 ON THE ABOVE MENTIONED DECISION OF THE CHENNAI BENC H OF THE TRIBUNAL AND OUR OBSERVATIONS HEREIN ABOVE. IT IS ORDERED ACCORDINGLY. GROUND NO.3: DISALLOWANCE AMOUNTING TO RS.1,04,94,000/- ON EXPORT COMMISSION UNDER SECTIO N 40(A)(IA) OF THE ACT FOR THE ASSESSMENT YEAR 2010-1 1: 6.1 THE LEARNED ASSESSING OFFICER HAD DISALLOWED THE EXPENDITURE OF RS.3,09,00,000/- INCURRED IN FOREIGN CURRENCY TOWARDS SALES COMMISSION, MEMBERSHIP COST OF DATA ACCESS CHARGES FOR DEVELOPMENT OF PROJECT ETC., PAID TO NO N-RESIDENT AGENTS DURING THE PREVIOUS YEAR 2009-10 BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT FOR NON- DEDUCTION OF TAX UNDER SECTION 195 OF THE ACT. 6.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) ALLOWED THE APPEAL OF THE ASSESSEE BY OBS ERVING AS UNDER:- 5.1 GROUND NO.1 RAISED BY THE APPELLANT IS AQAINST DISALLOWANCE OF RS.3,09,84,644/- U/S 40(A)( IA) OF THE IT ACT AS SALES COMMISSION TO NON- RESIDENT AGENTS. THE APPELLANT HAS SUBMITTED THAT OUT OF RS.3,09,84,644/-, ONLY RS.21,58,332/- REPRESENTS TH E SALE COMMISSION FOR WHICH IT HAD FILED RECTIFICATIO N APPLICATION BEFORE THE AO. IT HAS RELIED UPON THE DECISION OF INDOPEL GARMENTS P. LTD. (2001) 72 TTJ 702; DCIT VS. VENKAT SHOES LTD. 2009 - TIOL- 241 8 ITA NOS. 1520 & 1521/MDS/2016 MAD; DCIT VS. M/S DIVI'S LABORATORIES LTD. (ITAT HY D.) ITA NO.601/HYD/09; GLAXO SMITH KLINE PHARMACEUTICALS LTD. VS. ITO(2011) 48 SOT 643; SPAHI PROJECTS (P) LTD. (2009) 783 TAXMAN 92(AAR); DCIT VS. MAINETTI(INDIA) P.LTD. (2011) AND CEAT INTERNATIONAL S. A VS. CIT 237 ITR 259(BOM). THE COMMISSION PAID TO FOREIGN AGENTS FOR PROCURING ORD ERS CANNOT BE CALLED EITHER TO RENDERING OF TECHNICAL SERVICES OR MANAGERIAL OR CONSULTANCY SERVICES. THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)-II VIS. PANALFA AUTO ELEKTRIK LTD. 49 TAXMANN.COM 412 HAS HELD THAT THE SERVICES RENDERED FOR PROCUREMENT OF EXPORT ORD ERS ETC. CANNOT BE TERMED AS MANAGERIAL SERVICES PROVID ED BY THE NON-RESIDENTS. THE AO IS DIRECTED TO DELETE ADDITION OF RS.21,58,332/-. OTHER EXPENSES INCLUDE EXPENSES AS UNDER: AMT.RS. 1. TRAVEL EXPENSES 5,57,148 2. MARKETING & DEVELOPMENT EXPENSES 2,15,94,261 3. OTHERS (I)BUSINESS DEVELOPMENT 18,444 (II)MEMBERSHIP & SUBSCRIPTION 6,84,740 (III)PROJECT EXPENSES-DATABASE 22,96,590 (IV)PROJECT EXPENSES-EXPORTS 25,21,387 (V)PROJECT SOFTWARE EXPENSES 2,58,496 (VI)SEMINAR & CONFERENCE 4,51,034 (VII)TELEPHONE EXPENSES 4,44,211 TRAVEL EXPENSES ARE OUTSIDE THE PURVIEW OF SEC 40(A)(IA). MARKETING AND DEVELOPMENT EXPENSES ARE NOT DISALLOWABLE U/S 40(A)(IA) SINCE THE HON'BLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES VS. DIT 288 ITR 408 HAS HELD THAT SERVICES MUST BE UTILIZED IN INDIA AND RENDERED IN INDIA TO BE HELD TAXABLE IN INDIA. AS SERVICES ARE RENDERED OUTSIDE INDIA AND PAYMENT IS MADE OUTSIDE INDIA, MARKETING AND DEVELOPMENT EXPENSES ARE NOT DISALLOWABLE U/S 40(A)(IA) OF THE IT ACT. IN CASE O F OTHER EXPENSES, EXCEPT TELEPHONE EXPENSES OF RS4,44,211/-, SERVICES ARE RENDERED OUTSIDE INDIA A ND PAYMENT IS MADE OUTSIDE INDIA AND THEREFORE, NOT DISALLOWABLE U/S 40(A)(IA) OF THE IT ACT. THE AO IS DIRECTED TO DELETE ADDITION EXCEPT TELEPHONE EXPENS ES. THIS GROUND OF APPEAL IS PARTLY ALLOWED. 9 ITA NOS. 1520 & 1521/MDS/2016 6.3 SINCE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAVE DECIDED THE ISSUE RELYING IN THE DEC ISION OF THE HONBLE APEX COURT IN THE CASE ISHIKAWAJIMA- HA RIMA HEAVY INDUSTRIES. VS. DIT REPORTED IN 288 ITR 408 W HEREIN IT WAS HELD THAT THE SERVICES MUST BE UTILIZED IN IND IA AND RENDERED IN INDIA TO ATTRACT TAX LIABILITY IN INDIA , WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE ORDER OF THE LEA RNED COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE. ACCORDINGLY, THIS GROUND RAISED BY THE REVENUE IS D EVOID OF MERIT. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.1520/MDS/2016 IS PARTLY ALLOWED AS INDICATED HER EIN ABOVE AND THAT OF ITA NO.1521/MDS/2016 IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THE 2 ND NOVEMBER, 2016 SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) ( A.M OHAN ALANKAMONY ) ! # / JUDICIAL MEMBER # / ACCOUNTANT MEMBER ! /CHENNAI, ' /DATED 2 ND NOVEMBER, 2016 SOMU )* +* /COPY TO: 1. APPELLANT 2. RESPONDENT 3. , () /CIT(A) 4. , /CIT 5. * 0 /DR 6. /GF